Here I have a couple of urns. The one on the left contains 70 red balls and 30 black. The one on the right contains 30 red and 70 black.
While you weren’t looking, I reached into one of these urns and randomly drew out a dozen balls…4 of them were red and 8 were black.
1. If you had to guess, which urn would you guess I drew from?
2. What’s your estimate of the odds that you’re right?
3. Do you think you’re right beyond a reasonable doubt?
I stole this problem from the decision theorist Howard Raiffa, with some minor changes (he used bags instead of urns, and green and white balls instead of red and black — and he drew his twelve balls with replacement, rather than all at once, which has only a tiny effect on the probability). Here, with appropriate minor wording changes, is what Raiffa had to say:
Dick Thaler, writing in the New York Times, says so many wrong things about the estate tax that I don’t know where to begin. But let’s begin here:
First, it is incorrect to say the estate tax amounts to double taxation. The wealth in many large estates has never been taxed because it is largely in the form of unrealized — therefore untaxed — capital gains.
This is just not true. Virtually all of the wealth in every large estate has already been taxed at least once. Namely, it was taxed when it was earned. You do not understand this issue unless you understand the following simple example: Scrooge McDuck earns a dollar, makes some fortunate investments, and leaves a hundred million dollars in unrealized capital gains to his ne’er-do-well nephews. If Scrooge has to pay 50 cents income tax on that dollar, then he invests half as much, earns half as much, and leaves his nephews half as much. Scrooge’s fifty cent tax bill has already cost his nephews fifty million dollars.
People are dying so that you can read this blog. Your internet access fees could more than double the income of a $400-a-year Ghanaian laborer. People are starving to death, and there you sit, with resources enough to save them (and with reputable charities standing by to effect the transfers), padding your own already luxuriant lifestyle. That’s a choice you made. It’s a choice almost everyone in the First World makes. It might or might not be a horrific choice, but it’s one for which we easily forgive each other.
(Do you already give money to Ghanaian laborers? I applaud you and I wish others would do the same. But it doesn’t change the fact that other Ghanaian laborers are dying so you can have your Internet.)
Someday you might find yourself strolling through a desert with a bottle of water and stumble on a man dying of thirst. I bet you’ll offer him some water, and I bet you’d think much less of anyone who didn’t. But there is, as far as I can see, no important moral difference between surfing the web while Africans starve and strolling through the desert while men die in front of you.
Bill Gates is walking through the desert carrying a bottle of water. He passes a man who is half dead of thirst. Should he offer the man a drink? Should the law require him to?
We’ve been talking about economic efficiency and why it’s a good thing to care about. Today I want to look at this hardest of cases through the efficiency lens.
Let’s suppose Bill’s water is worth, say, $10,000 to him. He’d be willing to pay that much for it, and he wouldn’t cheerfully sell it for less. Why such a high number? It’s not because Bill enjoys his water any more than you or I do — it’s just because Bill happens to be filthy rich.
And the dying fellow? He’s willing to pay up to $100 for that water. He’d pay more if he had it, but $100 happens to be all he has in the world.
Should the law require Bill to give up his water? And regardless of the law, what’s his moral obligation?
The Washington Post’s Ezra Klein had a great idea this week: He asked a bunch of economists and pundits to tell him where the Laffer curve bends. In other words, what is the marginal tax rate above which higher taxes lead to lower revenues? Meanwhile, coincidentally or not, Paul Krugman blogged on the very same question.
There’s a lot worth mentioning here, but let me start with one point that will be relevant below: Imposing a 20% income tax is not the same as cutting your wage by 20%. That’s because the income tax grabs not just a chunk of your current wages, but also a chunk of the future interest and dividends those wages enable you to earn. So a 20% income tax will, in general, discourage work more effectively than a 20% wage cut. This is important if you’re using data on wage cuts to predict the effects of income taxes.
That having been said, let’s see what we can learn from the responses:
Yesterday’s post on deflation prompted a flurry of comments and emails remarking on how much economists disagree. This, I think, misses the point. Indeed, what I was trying to emphasize was that we all agree on the advantages of deflation as spelled out in Milton Friedman’s essay on The Optimum Quantity of Money. (I’ve put a quick summary of the key points here.) Therefore, the commentators who are currently worried about deflation must fall into two categories: First, there are the ignoramuses, of whom there are plenty on all sides of all issues. Second, there are those who are clearly not ignoramuses. Those in the latter camp have surely digested Friedman’s analysis, and understand the upside of deflation, but believe it is outweighed by some downside. It is frustrating to me that many of those commentators have failed to explain exactly what downside they have in mind.
So apparently we’re all supposed to be worried these days about the specter of deflation. I am doubly baffled by this—I don’t see the problem in theory and I don’t see the problem in practice. Maybe there’s something I’m missing.
Start with the theory: We learned long ago from Milton Friedman (who might have learned it from Irving Fisher) that a little bit of deflation is a good thing. That’s because deflation encourages people to hold money, and people who hold money aren’t buying stuff, and when other people don’t buy stuff, there’s more stuff left over for you and me.
There are a couple of other ways to see this, though they all come down to the same thing. Here’s the first: falling prices are good for buyers and bad for sellers, but that all washes out. It washes out in the aggregate because each gain to a buyer is offset by an equal and opposite loss to a seller. And it more or less washes out for each individual, because each of us sells roughly as much as we buy (including the sale of our labor.) But over and above all that, deflation enriches the holders of money, because their money increases in value as it sits around. That part is pretty much (may Milton’s ghost forgive me for putting it this way) a free lunch.
One argument that’s often made against legalized polygamy is that rich old men will marry lots of women, leaving lots of poor young men both single and sexually frustrated—-and that’s bad, because poor young single sexually frustrated men are prone to criminal acts of violence.
Over at Overcoming Bias, Robin Hanson objects that if people really believed this argument, they’d want to criminalize lesbianism and extramarital affairs, both of which also contribute to the problem of men-without-partners.
Okay, if Paul Krugman is going to keep on writing the same column twice a week every week forever, then I am going to keeping on objecting to it forever, though not, I promise, twice every week.
In response to the priorities of Senator John Kyl, Krugman writes: “So $30 billion in aid to the unemployed is unaffordable, but 20 times that much in tax cuts for the rich doesn’t count.” Oh, for goodness’s sake. $30 billion in aid to the unemployed might or might not be good policy and 20 times that much in tax cuts might or might not be good policy; that’s beside the point here. The point is that these are quite entirely separate issues and one’s position on the first need not dictate one’s position on the second. Aid to the unemployed is costly. Tax cuts are not. Didn’t I just say this?
Paul Krugman is at it again, casting aspersions on everyone who opposes extended unemployment benefits while offering absolutely no positive argument for those benefits. Let me explain what would count, to an economist, as a positive argument.
There’s no question that extending benefits would be good for the currently unemployed, and no question that it would be bad for those who are called on to foot the bill. Economists usually deal with that kind of conflict by asking what policy you’d prefer if you had amnesia, and and didn’t know your own employment status. (You can read a lot more about this approach to policy analysis in Chapter 16 of The Big Questions.) The amnesiac is an impartial judge who is forced to care about everyone, because he/she might be anyone.
The artwork above is courtesy of Jodi Beggs, proprietress of the lively Economists Do It With Models site, who graced us with a visit in yesterday’s comments and expanded on those comments on her own page. (That’s me kicking Paul Krugman in the gut.)
Jodi objects to the tone, and in part to the substance, of my response to Paul’s recent attacks on the “deficit hawks” who oppose various spending programs that Paul happens to favor. I’d summarized his rhetorical technique as follows:
Paul Krugman sinks to a new low with this passage:
In America, many self-described deficit hawks are hypocrites, pure and simple. They’re eager to slash benefits for those in need but their concerns about red ink vanish when it comes to tax breaks for the wealthy. Thus, Senator Ben Nelson, who sanctimoniously declared that we can’t afford $77 billion in aid to the unemployed, was instrumental in passing the first Bush tax cut, which cost a cool $1.3 trillion.
Where to begin?
First, no economist—let me repeat that—NO economist, not even Paul Krugman on the days when he’s being an economist—would count a tax cut as a cost for purposes of policy analysis. A cost is something that consumes resources, not something that changes the ownership of resources. My Principles of Economics students all understand this; so, presumably, does the Nobel-prize winning author of a prominent Principles textbook. (A possible exception: You could call a present-day tax cut costly if it necessitates a future tax increase which, for some reason, is costlier to collect than the present-day tax. I guarantee you this is not what Krugman has in mind. If it were,the $1.3 trillion number that he highlights would be totally irrelevant to the actual cost.)
Next, unemployment benefits are costly, both insofar as they discourage recipients from seeking work and insofar as they necessitate taxes that discourage productive activity. The cost of $77 billion worth of benefits is not $77 billion, but it’s not zero either.
So unemployment benefits are costly and tax cuts are not. Which doesn’t mean that all unemployment benefits are bad or that all tax cuts are good, but it’s plenty adequate to absolve the hypocrisy charge.
But Krugman, as is his wont lately, appears committed to the following flat-out dishonest rhetorical agenda:
When big companies (like, say, British Petroleum) wreak great havoc (like, say, by spilling millions of gallons of oil into the Gulf of Mexico), it can be good policy to make them compensate their victims (like, say, with a $20 billion claim fund). It can also be bad policy.
A.C. Pigou taught us that we get better outcomes when decisionmakers bear the costs of their actions. Ronald Coase taught us that Pigou’s lesson cuts two ways. The shrimp boats that are sitting idle today are sitting idle partly because BP decided to drill in the gulf, but also partly because the shrimpers chose to operate in the vicinity of an oil rig. In this case, making BP feel the costs of its own decisions entails insulating the shrimpers from the costs of theirs.
I’m visiting the Atlanta Fed this week, and had planned to arrive in my hotel room Tuesday evening in time to compose something interesting for you to read Wednesday morning. But the Atlanta airport was “closed for weather” as the airlines choose to word it, so I flew to Greenville, SC instead, drove a rental car to Atlanta, and arrived too late to say anything thoughtful.
I will leave you instead with this seven-year-old quote, and let you contemplate how history might have been different if anyone had listened:
Today, I will introduce the Free Housing Market Enhancement Act, which removes government subsidies from the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the National Home Loan Bank Board. . . . Congress should act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors who were misled by foolish government interference in the market.
In a blog post on what he calls the “Bad Logic of Fiscal Austerity”, Paul Krugman lays the following calculation before the public:
Let me start with the budget arithmetic, borrowing an approach from Brad DeLong. Consider the long-run budget implications for the United States of spending $1 trillion on stimulus at a time when the economy is suffering from severe unemployment.
That sounds like a lot of money. But the US Treasury can currently issue long-term inflation-protected securities at an interest rate of 1.75%. So the long-term cost of servicing an extra trillion dollars of borrowing is $17.5 billion, or around 0.13 percent of GDP.
Yes. That’s the long-term cost of borrowing an extra trillion dollars. (Actually, the cost is even lower than Krugman says it is.) But the long term cost of spending an extra trillion dollars is somewhere in the vicinity, of, oh, about a trillion dollars, or about 7.4% of GDP.
Now you might argue that if some of that spending puts unemployed resources to work, then the true cost of spending a trillion is somewhat less than a trillion, but Krugman, at least here, does not attempt to make that argument. Nor do I expect that even Paul Krugman would dare to argue that an adjustment for unemployed resources could reduce the cost of government spending by roughly 98%.
Krugman is right when he says that borrowing is cheap. But the issue isn’t borrowing; it’s spending—and spending is expensive. It appears that like the President, Krugman wants to divert your attention from spending to borrowing so he can dismiss legitimate concerns without even acknowledging them. It’s a cheap trick. Don’t let either of them get away with it.
Edited to add: In fairness to Krugman, he appears to be imagining that the trillion is never paid back, so that the cost of spending it is simply the debt service of 17.5 billion per year forever. But his column makes it sound like the cost is a single one-time payment of 17.5 billion, which is absurd.
The White House has dispatched Christy Romer, a distinguished economist and chair of the President’s Council of Economic Advisors, to rustle up support for emergency spending to keep teachers employed. Her piece in the Washington Post is remarkable for a complete absence of arguments in favor of spending this money on teachers as opposed to say, plumbers or cab drivers or pharmaceutical researchers or computer programmers or minor league ballplayers. (See for yourself.)
So why the singular focus on teachers? The answer, of course, is that unlike plumbers or cab drivers or pharmaceutical workers or computer programmers, teachers, through their unions, were major contributors to the Obama campaign.
All victorious politicians engage in the unsavory practice of diverting spoils to their most vigorous supporters at everyone else’s expense. In this, the current administration may be no more blameworthy than any other. But I’m pretty sure that sending out the chair of the Council of Economic Advisors to defend these political payoffs marks a new sort of low. Traditionally, the Council is composed of first-rate academics whose job is to give good counsel and remain above the political fray. Shame on the President for debasing that noble mission, and shame on Christy Romer for going along with it.
I guess this is why I never got that call from the New York Times.
To be a Times contributor, you apparently have to write like Mara Gay, who penned these lines for a front page article last week:
New York may soon become the first state to offer employment protection for nannies.
The state Senate passed a bill of rights for domestic workers this week, a measure that would require employers to offer New York’s approximately 200,000 household workers paid holidays, overtime pay and sick days.
Supporters say the step will provide needed relief to thousands of women — and some men — who are helping to raise the children of wealthier New Yorkers without any legal workplace rights beyond the federal minimum wage.
Now, you see, if I had been writing this article, it might have opened more like this:
In his speech at Carnegie-Mellon yesterday, the President lamented the growth of federal spending and proposed to attack the problem partly by letting the Bush tax cuts expire. Can you say non sequitur, boys and girls?
Now as it happens, I’ve got this maple tree in my yard that’s been growing much too fast for my tastes. In fact, it’s been growing far faster than I have. But inspired by the president, I’ve found a solution. I’m going to stock up on E.L. Fudge Double Stuf cookies so I can grow faster than the maple.
The President raises the real problem of excessive spending so that he can misdirect your attention to the phony “problem” of excessive government debt—that is, an excessive gap between spending and tax revenues. This is very like my raising the real problem of my overlarge maple tree in order to misdirect your attention to the phony “problem” of an excessive gap between the height of the maple and the size of my waistline—giving both me and the President equally flimsy excuses to do exactly what we wanted to do in any case, namely gorge out on junk food or let taxes rise.
Monday I insisted that all reasonable people should be at least mildly disturbed by the diminution of property rights implicit in a ban on whites-only lunch counters.
Tuesday I cited an excellent comment from Jonathan Pryor suggesting that a whites-only lunch counter is itself an indirect assault on property rights insofar as the owners expect taxpayers to foot the bill for enforcement of the whites-only policy (say, by calling the police when unwanted visitors show up).
There are circumstances in which I think Pryor’s argument clearly applies. I cited the case of the man who keeps a barrel of Hershey bars on his front lawn and expects the police to stop children from filching them. Surely this man is imposing a burden on the community over and above the assertion of his own property rights. But I also gave several other examples that gave me pause about the applicability to lunch counters.
This in turn brought forth an insightful comment from Ken B, who points out that the Civil Rights Act itself called for a lot of taxpayer-financed enforcement. The act was passed, blacks sat down at lunch counters, owners attempt to evict them, the police were called.
I had planned to get back to our friend the absent-minded driver today, but yesterday’s post on Rand Paul garnered (at least) one comment so good that it deserves to be highlighted.
I said yesterday that the 1964 Civil Rights Law (forbidding racial discrimination in places of public accommodation) infringes on property rights and that all reasonable people ought to be disturbed by that, even if their ultimate judgment is that the benefits of the law outweigh its costs.
Our commenter Jonathan Pryor responded, in effect, as follows (I am paraphrasing):
When you open a restaurant and announce that you won’t serve blacks, you’re not just announcing that you won’t serve blacks. Instead, you’re implicitly announcing that whenever a black person comes in and asks for service, you’re going to call the police and ask the taxpayers to subsidize the cost of your taste for discrimination. You have no property right to those taxpayer dollars.
My first reaction was: This is an excellent point, which I haven’t seen raised before. For the most part, that’s still my reaction. Still, this argument cannot be definitive as a matter of principle, because the same argument applies in many cases where we clearly reject its conclusion. After all, when you open a restaurant, you’re implicitly announcing that whenever a naked person asks for service you’re going to call the police and ask the taxpayers to cover the cost of removal. For that matter, you’re going to call the police every time you get robbed. But we don’t conclude that it should always be illegal to open a restaurant.
Having linked recently to a Fox News segment hosted by a close evolutionary cousin of a sea cucumber, I am delighted to balance the scales with this clip of a thoughtful and literate three-way conversation about Arizona’s anti-immigration statute, featuring Judge Andrew Napolitano, the journalist Jack Hunter, and my hero, George Mason University’s inestimable Don Boudreaux.
Writing in the New York Times, law professor Kris Kobach promises to rebut all the major objections to Arizona’s new anti-immigration law and proceeds to ignore all the major objections. Professor Kobach’s idea of a major objection is “It’s unfair to demand that aliens carry their documents with them”, whereas my idea of a major objection is “It’s idiotic, hateful and destructive to put obstacles in the way of productive activity.”
The number of “unauthorized aliens” in Arizona at any given moment is estimated as just under a half million—about the same as the number of Jews in New Jersey. Over half the text of the Arizona law is devoted to penalizing employers who hire these people. Now suppose for a moment that the New Jersey legislature were to pass a bill penalizing anyone who hires a Jew. Would Professor Kobach defend this law, as he does Arizona’s, by pointing out that it doesn’t require anyone to carry a driver’s license?
The anti-immigration hysterics keep warning us that foreigners want to come over here and exploit our welfare system. The insincerity of that stance is exposed whenever, as in Arizona, its proponents set out to prevent those very same foreigners from coming here and working.
After six months of blogging nearly every weekday, I’m taking a four day weekend. This will give you a chance to browse through the archives for all the good stuff you might have missed. Or, if you’re looking for a good read to tide you over, I can recommend Chapter Two of my book Fair Play. Some of the examples are dated (Wal-Mart, as far as I know, no longer advertises that “we buy American so you can too”), but it makes a good companion piece to yesterday’s post.
I’ll be back on Tuesday with, I expect, something new to say.
You guys—with your thoughtful, witty and relevant comments—have made me thankful I took up blogging. My (considerable) experience with the mainstream media suggests that you meet a much lower class of people there. Let me give you an example.
Once upon a time I wrote a Forbes column drawing an analogy between protectionism (which discriminates on the basis of national origin) and racism (which discriminates, of course, on the basis of race). (Of course the analogy isn’t perfect. For example, racism can be a solitary hobby, whereas protectionism by its nature forces other people to discriminate as well.) There were many responses, of which my favorite was Pat Buchanan’s screed containing both some hilariously misguided economics and a paragraph I’ve had posted on my office door ever since:
Now I do not know what parents pay to send their kids to the University of Rochester. But if the philosophical imbecility of Landsburg is representative of the faculty, it is too much.
Shortly afterward, I was scheduled to appear on John Gibson’s program on Fox News, where the following exchange took place:
This, in turn, led to a flurry of email. To give you the full flavor, and so as not to bias the sample, I am appending every single email I received on this subject, excepting only one relatively positive note from my mother.
A friend living in England (the philosopher Jamie Whyte, actually, whose writing has graced this very blog) sends along a little vignette for the benefit of my American readers who see European health care systems through rose colored glasses.
A 64 year old breast cancer survivor suffering severe back pain is told she’ll have to wait five months for an appointment with an orthopedic surgeon through the National Health Service (NHS). She therefore (and perfectly legally) chooses to pay 250 pounds (about 385 dollars) for a private appointment. He puts her on a waiting list for surgery to remove a cyst from her spine, surgery which is routinely covered by the NHS. But the NHS decides that since she can afford 250 pounds for a private appointment, she can also afford 10,000 pounds (over 15,000 dollars) for private surgery. They therefore deny to provide her the surgery for which she’s been paying taxes her whole life.
This was not an isolated incident; until recently, cancer patients were routinely denied further NHS treatement after privately purchasing lifesaving drugs that are not available through the NHS.
More details here. It’s worth reading the comments, where readers excoriate the patient for “queue jumping” because she used the price system to signal her high demand for medical services. Note that nobody complains about “queue jumping” in the market for, say, oranges, because oranges are not rationed by government bureaucrats and therefore do not generate queues.
The lesson, I think, is that once an inefficient bureaucracy becomes entrenched, a certain fraction of the electorate becomes incapable of imagining anything better. In this case, that fraction seems to have forgotten first that some people need medical care more desperately than others, so that “queue jumping” can be desirable, second that private payments to doctors actually call forth more medical care and therefore shorten queues, and third that maybe it would be better to have a system that didn’t require queuing in the first place.
What a relief. Now that April 15 is out of the way, my tax rate is back to zero for another year.
At least that’s the way the President of the United States seems to have it figured—your tax burden, according to him, is measured by what you’re paying right this moment as opposed to what you’re obligated to pay in the future.
That’s the only possible interpretation of his statement last night that Tea Partiers (and others) should be thanking him for cutting taxes. The reality is that President Obama, like President Bush before him, has rather dramatically raised government spending and therefore has raised your taxes. To say otherwise is like saying you got your new swimming pool for free because you put it on your credit card.
Once the money is spent, the bill must eventually come due—and there’s nobody around to foot that bill except the taxpayers. We are locked into higher current spending and therefore locked into higher future taxes. The president hasn’t lowered taxes; he’s raised and then deferred them. To say otherwise is—let’s be blunt—a flat-out lie.
Having blogged twice this week (here and here) on Paul Krugman’s green economics essay, I want to add a couple of quick comments on what it takes to contribute usefully to this discussion.
Yesterday I blogged about Paul Krugman’s recent piece on climate control policy. The bottom line: After recovering from a shaky start, Krugman does a good job of laying out the issues and posing many (though not quite all) of the right questions. But I’m not sure he gets the answers right.
A few years ago, writing in Slate, I listed the key questions that the Al Gores of the world mostly fail to address or even acknowledge. (See also the discussion on pages 186-190 of The Big Questions.) Krugman (thankfully) is no Al Gore, and he does address most of these questions. Let’s see how he does with them.
Halfway through reading Paul Krugman’s New York Times piece on green economics, I had my snarky retort all ready to go. Then in the second half he went and got all reasonable on me. I still don’t buy his conclusions, but (sadly for readers who like fireworks), he’s not (at least in this instance) nuts.
Today is the ninety-ninth anniversary of the legendary fire at the Triangle Shirtwaist Factory, which reigned for ninety years as the worst workplace disaster in New York history. A hundred and forty six workers died that day, most of them young women. Escape routes were cut off by doors that were kept locked to prevent employee pilfering. The main exit from the factory floor was designed so that only one person at a time could pass through; departing workers had their handbags inspected by a night watchman. “It comes down to dollars and cents against human life, no matter how you look at it”, in the words of then-Fire Chief Edward Croker.
Well, yes, of course it comes down, at least in part, to dollars and cents against human life (where “dollars and cents” are, of course, stand-ins for “a whole lot of other things we care about”). The interesting question is whether the terms of trade were favorable. In other words: If the workers, in advance of the fire, had been fully informed of all the risks and all the potential consequences, would they have wanted those doors locked or open? Or more generally: When the New York state legislature responded to the fire with over two dozen new occupational health and safety laws, were they compounding the disaster?
Yesterday, I posed these questions:
